The Indian insurance industry is undergoing pivotal regulatory reforms. These are aimed at unlocking its potential to contribute to India's growing economy, while ensuring that the population is adequately insured. India is one of the fastest growing economies and its insurance market (currently ranked 10th) is among the fastest growing markets globally. However, India's insurance penetration (i.e., percentage of insurance premiums to GDP) remains relatively low, having dropped to 3.7% in the year 2023-24 (from 4% in the year 2022-23). On the other hand, insurance density (i.e., ratio of premium to population) in India marginally increased to USD 95 in 2023-24 (from USD 92 in 2022-23).1
This paper discusses certain key recent legal, regulatory and market developments as well as steps being taken by Insurance Regulatory and Development Authority of India (IRDAI) with a view to augment inflow of foreign capital in the sector, further enhance ease of doing business, improve insurance penetration and ensure greater transparency in operations of insurers.
A. Foreign Investment Limits
Background
India opened its insurance market to foreign players in 2000 at which point foreign equity participation was allowed up to 26% in the sector. Subsequently, foreign direct investment (FDI) limits were increased up to 49% in 2015 and there was a requirement for Indian insurance companies to be 'Indian owned and controlled'. IRDAI's guidelines on 'Indian owned and controlled' have since been withdrawn with the increase of FDI limit to 74% in 2021.2
Current Regime
In 2021, the FDI limits were increased to 74% and certain foreign investment linked conditions were notified. The Indian Insurance Companies (Foreign Investment) Rules, 2015 provide that, in an Indian insurance company with any foreign investment, a majority of the directors and key managerial personnel and at least one among the chairperson, managing director and chief executive officer must be resident Indian citizens. Additionally, where foreign investment exceeds 49%: (a) if the chairperson of the board of directors (Board) is not an independent director (ID), at least half of the Board must comprise of IDs; alternately, if the chairperson is an ID, then at least a third of the Board must comprise of IDs; (b) for a financial year for which divided is paid on equity shares, if, at any time, the solvency margin is less than 1.2 times the control level of solvency, at least 50% of the net profit for such financial year must be retained in general reserve.
Despite the increase in FDI limit to 74%, foreign players still need an Indian partner to operate insurance businesses in India. Furthermore, barring a few instances wherein the foreign JV partner has acquired majority shareholding in their joint ventures, majority ownership and control of Indian insurers by and large remains with the Indian partner.
Proposed Liberalisation of FDI Limits
The insurance sector being capital-intensive, India would need more players in the sector to boost insurance penetration. IRDAI believes that the time is right for 100% FDI to be permitted in the sector. This move would indeed enable foreign investors to set up shop and operate independently without dependence on Indian players. However, from a legislative standpoint, increase in the FDI limits requires an amendment of the Insurance Act, 1938 (Insurance Act).
The Department of Financial Services, Ministry of Finance, through an office memorandum dated November 26, 2024 (Memorandum)3 had invited comments on certain proposed amendments to the Insurance Act. Among other amendments, increase of the FDI limit for Indian insurance companies to 100% was also contemplated. It was expected that the amendment bill would be introduced in the recently concluded winter session of the Parliament. However, press reports indicate that this was not feasible as a few changes were required to be incorporated in the draft bill based on stakeholder comments. It is now expected that the amendment bill will be introduced in the upcoming Budget session. It is also possible that these amendments may be announced by the Finance Minister in her budget speech on February 1, 2025.
B. Listing of Insurers
Background
In the year 2016, IRDAI had released a discussion paper for mandatory listing of insurers seeking industry's views on its proposal.4 IRDAI had proposed that: (a) general insurers (including standalone health insurers and reinsurers) must take steps to get listed upon completion of 8 years of operations and life insurers upon completion of 10 years of operations; (b) all insurers whose years of operations had exceeded the number of years indicated above must initiate steps to ensure that their shares are listed within 3 years from issuance of the guidelines. Insurers meeting the above criteria would have to: (i) take up the matter with their respective Board within 3 months; (ii) file with IRDAI a Board approved roadmap for listing (within 45 days of Board approval); and (iii) initiate action for listing as per the roadmap within the IRDAI approved time period. In addition to advantages to the promoters and shareholders upon listing, the following benefits were noted as rationale for IRDAI's proposal:
- Enabling participation of retail and institutional investors in the financial success of the insurer;
- Increased transparency in operations of the insurer with higher disclosure standards applying to a listed insurer as well as greater scrutiny of decision making; and
- Statutory protection of minority shareholders' interest.
Additionally, listing would help reduce dependence / burden on promoters for meeting solvency / capital requirements of insurers and help improve corporate governance standards of insurers. Notably, under the erstwhile corporate governance guidelines for insurers issued in 2016, unlisted Indian insurers were, in any case, required to familiarise themselves with corporate governance structures and requirements applicable to listed entities and initiate steps to address identified gaps. This was prescribed to facilitate transition at the time of their listing in due course.5
Relaxation and Simplification of Regulatory Regime
While time bound listing of insurers was considered, listing has still not been mandated under regulations, including under the recently enacted IRDAI (Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers) Regulations, 2024 (Registration Regulations). The Registration Regulations incorporated provisions governing listing of insurers and superseded IRDAI's erstwhile regulations governing listing of life and non-life insurers.6
Having said so, IRDAI has undertaken certain regulatory changes to help facilitate and encourage listing of insurers under the Registration Regulations, as discussed below:
- IRDAI's prior approval requirement for listing has been done away with; rather, approval of IRDAI is now required only for transfer of shares (pursuant to offer for sale or fresh issuance of shares) in the initial public offering. Further, IRDAI needs to be intimated before the financial sector regulator is approached for listing and subsequent developments must also be informed to IRDAI. These changes would help simplify the IRDAI approval process and help minimize regulatory intervention.
- An insurer can now approach the 'appropriate financial regulator' for listing of its equity shares, as opposed to listing only on Securities and Exchange Board of India (SEBI) recognised stock exchanges. Effectively, listing of insurers on stock exchanges recognised by the International Financial Services Centres Authority (IFSCA) has now been facilitated.
- IRDAI no longer specifies any disclosure requirements for the offer document (which were mandated under the erstwhile regulations). Effectively, the offer document need only comply with the requirements specified by SEBI / IFSCA (as applicable).
- While lock-in requirements apply to investments made by promoters / investors, the Registration Regulations contemplate that IRDAI may relax the lock-in restrictions applicable to an insurer to facilitate listing of shares.
- In an unlisted insurer, promoters' collective shareholding must be above 50% of the paid-up equity capital. However, promoters of a listed entity are permitted to dilute their collective stake up to 26% of the paid-up equity capital if the insurer has maintained solvency above control level in the immediately preceding 5 years.
Regulator's Nudge
Recent press reports indicate that IRDAI has been nudging large / established insurers (who have completed 10 to 15 years of operations) to get listed on the stock exchanges.7 In this regard, IRDAI has reportedly also met the promoters of large Indian insurance companies and have sought a road map for getting listed within next 2 to 3 years. If such plan is not voluntarily provided by insurers, then, IRDAI would further engage with them.8 Also, parent entities of large life insurance companies have been asked to submit a detailed plan / roadmap for listing by January 31, 2025.9 The nudge of the regulator coupled with the regulatory changes to facilitate and simplify listing may help increase the count of listed insurers. Notably, in addition to the General Insurance Corporation (i.e., the stated owned reinsurer), only 10 out of 34 general insurers (which includes 7 standalone health insurers) and 26 life insurers are currently listed.
C. Other Proposed Reforms
Along with liberalisation of the FDI limits, the Central Government and IRDAI have also proposed other reforms under the Memorandum such as issuance of composite license (i.e., enabling an insurer to carry one or more classes of insurance business), reduction in requirement of net owned funds for foreign reinsurers (from INR 5,000 crore to 1,000 crore) and empowering IRDAI to specify lower entry capital (not lesser than INR 50 crore) for any class of insurers servicing underserved or unserved segments on special case basis. Presently, the minimum paid-up capital of life / non-life insurers is INR 100 crore and that of reinsurers is INR 200 crore. Further, subsequent press reports have indicated that the composite license may only be available for private insurers and not public sector insurers for now.10
Concluding Remarks
Reforms for liberalising FDI limits and reducing capital requirements would incentivise entry of new players in the sector. We may also potentially witness a shift in the Indian insurance landscape with various foreign players relooking at their India strategy and considering entering the market independently. In some cases, this may also necessitate restructuring of their existing Indian investments in the sector since regulations restrict a person from becoming a 'promoter' in more than one insurer engaged in the same class of insurance business. Listing of insurers resulting in adherence to higher standards of corporate governance would help ensure that policyholders' interests are better protected.
While the above reforms are awaited, one must also consider the fine print of the amendments, particularly the attendant conditionalities that may be prescribed by the regulator while liberalising the FDI limits. Also, to help facilitate investments, IRDAI could also consider streamlining the regulatory approval processes with truncated timelines for processing applications. Regardless, these steps and proposed reforms would certainly help augment infusion of capital and help increase number of insurers in the sector, which in turn will aid the growth of the Indian insurance market and potentially help realise the regulator's objective for achieving "insurance for all by 2047".
Footnotes
1. IRDAI's Annual Report 2023-24 (https://irdai.gov.in/document-detail?documentId=6436847).
2. IRDAI's Guidelines on Indian owned and controlled issued on October 19, 2015. These were withdrawn by IRDAI pursuant to IRDAI's Circular dated July 30, 2021.
3. https://financialservices.gov.in/beta/sites/default/files/2024-11/OM.pdf
4. The discussion paper released by IRDAI can be accessed through this link.
5. Para 4.1, IRDAI's Guidelines for Corporate Governance for insurers in India issued on May 18, 2016. These guidelines have since been repealed pursuant to IRDAI's Master Circular on Corporate Governance for Insurers, 2024 issued on May 22, 2024.
6. IRDAI (Issuance of Capital by Indian Insurance Companies transacting other than Life Insurance business) Regulations, 2015 and IRDAI (Issuance of Capital by Indian Insurance Companies transacting Life Insurance business) Regulations, 2015
9. IRDAI seeks roadmap for public listing of large life insurance subsidiaries - CNBC TV18
10. https://indianexpress.com/article/business/composite-licence-private-insurers-9726689/.
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